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North Carolina medical marijuana sales begin at Cherokee store
Ukrainian and Western leaders laud US aid package while the Kremlin warns of 'further ruin'
Biden sees a $35 price cap for insulin as a pivotal campaign issue. It’s not that clear-cut
'Civil War’ continues box-office campaign at No. 1
Hawaii lawmakers take aim at vacation rentals after Lahaina wildfire amplifies Maui housing crisis
Conservative Brazilians laud Elon Musk at rally in support of ex-president Bolsonaro
Tens of thousands of Colombians protest against the leftist president's reform agenda
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
North Carolina medical marijuana sales begin at Cherokee store
Ukrainian and Western leaders laud US aid package while the Kremlin warns of 'further ruin'
Biden sees a $35 price cap for insulin as a pivotal campaign issue. It’s not that clear-cut
'Civil War’ continues box-office campaign at No. 1
Hawaii lawmakers take aim at vacation rentals after Lahaina wildfire amplifies Maui housing crisis
Conservative Brazilians laud Elon Musk at rally in support of ex-president Bolsonaro
Tens of thousands of Colombians protest against the leftist president's reform agenda
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
North Carolina medical marijuana sales begin at Cherokee store
Ukrainian and Western leaders laud US aid package while the Kremlin warns of 'further ruin'
Biden sees a $35 price cap for insulin as a pivotal campaign issue. It’s not that clear-cut
'Civil War’ continues box-office campaign at No. 1
Hawaii lawmakers take aim at vacation rentals after Lahaina wildfire amplifies Maui housing crisis
Conservative Brazilians laud Elon Musk at rally in support of ex-president Bolsonaro
Tens of thousands of Colombians protest against the leftist president's reform agenda
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
North Carolina medical marijuana sales begin at Cherokee store
Ukrainian and Western leaders laud US aid package while the Kremlin warns of 'further ruin'
Biden sees a $35 price cap for insulin as a pivotal campaign issue. It’s not that clear-cut
'Civil War’ continues box-office campaign at No. 1
Hawaii lawmakers take aim at vacation rentals after Lahaina wildfire amplifies Maui housing crisis
Conservative Brazilians laud Elon Musk at rally in support of ex-president Bolsonaro
Tens of thousands of Colombians protest against the leftist president's reform agenda

Invesco Q2 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Greg Ketron
    Head of Investor Relations and Treasury
  • Marty L. Flanagan
    President and Chief Executive Officer
  • Allison Dukes
    Senior Managing Director & Chief Financial Officer

Analysts

Presentation

Operator

Welcome to Invesco's Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. Now, I'd like to turn today's meeting over to your host, Mr. Greg Ketron, Invesco's Head of Investor Relations. Sir, you may begin.

Greg Ketron
Head of Investor Relations and Treasury at Invesco

Thanks, operator, and to all of you joining us on Invesco's quarterly earnings call. In addition to our press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for, and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.

Marty Flanagan, President and Chief Executive Officer; and Allison Dukes, Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open up the call for questions.

Now, I'll turn the call over to Marty.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Thank you, Greg. And I'll start on Slide 3, which is our business highlights of the quarter. So, let me start on that page so far. So, the market environment we have experienced for the first half of this year has been one of the most challenging in decades. Global equity and debt markets delivered the worst first half returns we've seen in decades, as investors reacted to uncertainty associated with rising fears -- recession fears, higher inflation, interest rate hikes and geopolitical tensions. Against this backdrop for the industry, and despite seeing the first net long-term outflows quarter in two years, our diversified product lineup maintained net inflows in key capability areas, notably ETFs, active fixed income, Greater China where we maintain leadership positions.

Our global ETF platform generated inflows at $4.8 billion in the quarter, the equivalent of 7% annualized organic growth rate. Our ETF product suite remains differentiated from competitors with a strong presence in higher revenue, higher growth segments such as smart data. And we continued to gain market share during the quarter. Our active fixed income business generated net inflows of $2.2 billion, with strong flows into shorter duration strategies given the market backdrop.

Our business in Greater China delivered $1.8 billion in net long-term inflows this quarter. Growth was driven by our China joint venture where we saw strong demand for fixed income capabilities as investors sought risk-off assets. As we showcased previously, our business in China is uniquely positioned as a result of many years of investment and hard work, building relationships with our clients and key stakeholders in the region. Growth in China continued despite difficult business conditions, which included COVID lockdowns in major cities. We are optimistic that the economic outlook in China is beginning to improve as COVID shutdowns ease and the government takes steps to boost the economy. As markets recover, we are well positioned to capture future growth in the fastest growing market for asset managers in the world.

I also wanted to highlight our institutional business, which was in net inflows for the 11 consecutive quarters with $1.5 billion. The channel has been a steady source of growth and we have made tremendous progress in building the business to nearly $0.5 trillion in assets under management. The channel is well diversified by asset class, led by fixed income and alternatives, as well as geography, where we have a significant presence in each of the three global regions. The process of a broad range of client types in our pipeline continues to be solid. Our solutions capability remains integral to the success in this channel, and enabled a third of our pipeline this quarter. We expect our institutional business to remain a key strength for us in the quarters ahead.

Despite broad-based growth in key capabilities, net outflows in equity strategies were $7.7 billion in this quarter, and drove overall net negative outflows. In active global equities, in particular, we experienced net outflows investor preference for risk-off trades led to higher redemptions in the quarter, including our developing markets fund, which saw $2.6 billion of net outflows. We looked at Invesco's ability to whether this volatile period, and our focus and building a stronger balance sheet has resulted in much greater flexibility.

As I mentioned last quarter, we took advantage of the economically attractive opportunities to early redeem $600 million of long-term debt. As a result, total debt outstanding at the end of the second quarter is at lowest level since 2015, and our leverage profile has been steadily improving. We've increased cash return to shareholders through share buybacks, along with a 10% dividend increase we announced in April. The progress we've made on the balance sheet will allow us to take advantage of future opportunities and continue to invest in our business, and increase return to shareholders over the long term.

We met our target of $200 million in annual cost savings from our strategic review. Our focus of that will now shift to our ongoing expense management discipline and we will be deliberate as a management team in continuing to scale our business platform -- global business platform and invest in key areas of growth. In this uncertain environment, clients seek an investment manager that can partner with them to meet a comprehensive range of constantly evolving needs and solve their most challenging problems. Our broad set of investment capabilities and differentiated platform we've built positions us well to continue to meet our client needs and compete in a dynamic market environment.

Looking ahead, we will balance managing through near-term volatility, while continuing to build a business that can compete and win over the long term. On global -- when the global industry growth resumes, we are well positioned to capture demands across a wide range of client types and investment capabilities. Challenging times truly separate great companies from the pack, and we are confident that our unwavering commitment to client needs will distinction Invesco as one of the top firms in our industry.

With that, I'll turn it over to Allison. Allison?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Thanks, Marty, and good morning everyone. I'll start with Slide 4. Our investment performance continued to be solid in the second quarter, with 55% and 60% of actively managed funds in the top half of peers, or beating benchmark on a three and a five year basis. These results reflect continued strength in fixed income and balanced product, areas where we continue to see demand from clients globally.

Moving to Slide 5, we ended the second quarter with $1.39 trillion in AUM, a decrease of $166 billion from March 31, as significant market declines and FX rate changes contributed to $160 billion of the decline. As Marty mentioned earlier, we experienced our first net long-term outflow quarter in two years, with $6.8 billion in net outflows. Despite that, our business has proven resilient, and our relative net flow performance in the period was among the strongest in our peer group. Our passive business continued to grow with $4.5 billion in net long-term inflows. Growth in passives was offset by $11.3 billion of net long-term outflows and active capabilities.

The institutional channel continues to demonstrate the breadth and resilience of our platform, with $1.5 billion of net long-term inflows in the second quarter. The channel has been a consistent source of growth and has now been in net inflows for 11 straight quarters. We continue to see mandate fund across a diverse range of capabilities, and as I'll discuss later, our pipeline remains solid. Global market volatility weighed on the retail channel this quarter, which experienced $8.3 billion of net outflows, primarily in the Americas and EMEA.

ETF and index strategies remain a key growth area for Invesco, and were a source of relative strength in the second quarter, with $4.8 billion of net long-term inflows. Excluding the QQQs, Invesco captured 6.1% of industry's net inflows, significantly higher than our 3.2% share of total industry assets under management.

Moving to Slide 6, we experienced a slowdown in net flows across all regions this quarter amidst exceptional market volatility. Net flows were positive in Asia-Pacific, inclusive of $2.2 billion of net long-term inflows into our China joint venture. As we've showcased previously, we are uniquely positioned in China, and expect growth to accelerate there as the economy recovers and COVID restrictions ease. Consistent with industry trends, net flows slowed in the Americas and EMEA with both regions in net long term outflows for the quarter.

From an asset class perspective, we saw strength in fixed income in the second quarter, with net long-term inflows of $4.8 billion. Drivers of fixed income flows included our China JV, stable value, and several fixed income ETFs. We experienced net outflows in alternative this quarter, as net inflows and direct real-estate mandates, and two new CLOs were offset by net outflows and bank loans and our global targeted returns capability. Year-to-date, net inflows into alternatives were 4 -- excuse me, were $5.9 billion, equivalent to a 6% organic growth rate. Excluding $2.5 billion in net outflows and global targeted return, organic growth in alternatives is 8% year-to-date.

As global markets declined significantly in the quarter, we experienced $7.7 billion of net outflows in equity capabilities. We continue to see higher redemptions pressure in some of our larger equity funds, particularly in global and developing market equities, which accounted for $6.6 billion of the net outflows.

Moving to Slide 7. Our institutional pipeline was $24 billion at quarter end, a decrease of about $5 billion from the prior quarter due to fundings during the second quarter, as well as normal fluctuations and the timing of client investments. Our pipeline has been running in the $25 billion to $35 billion range, dating back to late 2019, so this was close to the lower end of that range. While the pipeline is strong, we are seeing some delays in mandates funding due to market uncertainty, and expect that the typical funding cycle may lengthen by one to two quarters.

The pipeline also remains relatively consistent to prior quarter levels in terms of fee composition, with an average fee rate running between the mid-20 and mid-30 basis point range. Overall, the pipeline continues to be diversified across asset classes and geographies. Our solutions capability enabled 33% of the global institutional pipeline, and created wins and customized mandate. This has contributed to meaningful growth across our institutional network.

Turning to Slide 8, the significant declines in global markets over the past several months have impacted our revenue base. Second quarter 2022 net revenue of $1.17 billion was 6% lower than last quarter, and 10% lower than the second quarter of 2021. Despite the volatile market backdrop, net revenue remained 13% higher than the second quarter of 2020, the last time we experienced this type of broad market decline.

Money market fee waivers abated during the quarter after the Federal Reserve raised rates twice to combat inflation. In the net money market, fee waiver impact had declined to $12 million in the first quarter of this year, and it was less than $4 million in the second quarter. Moving forward, we do not expect money market yield waivers to materially affect our revenue base.

Total adjusted operating expenses of $762 million were up $4 million, or less than 1% as compared to the first quarter of 2022, and flat to the second quarter of 2021. Declines in employee compensation due to seasonally lower payroll taxes and variable incentive pay were offset by increases in other expense categories. G&A expenses were $17 million higher than the first quarter as we incurred $14 million of fund related expenses during the period that we do not expect to recur in the future.

The increase in property office and technology expenses can be attributed to additional rent associated with the move of our Atlanta headquarters to a new development in Midtown Atlanta in early 2023. We took possession of our new building in April as we build out the space, while continuing to operate from our current Atlanta office. As a result, property and office expense will remain $2 million to $3 million above the eventual run rate for the next four to five quarters.

As COVID restrictions eased across North America and Europe, we saw a meaningful return of client activity in business travel, which contributed to increases in marketing, and G&A expenses that I'll cover on the next slide. Interacting in-person again with our clients and our colleagues around the globe is integral to our success, as we transition to our new normal ways of working. We remain highly focused on disciplined expense management, while continuing to deliver for our clients.

Moving to Slide 9. As of the end of the second quarter, we have met our initial $200 million savings goal from our strategic evaluation program. As compared to a normal pre-COVID run rate of expenses, we have delivered $213 million of annualized savings across employee compensation, our facilities portfolio, and third party spend, which includes a new -- a lower new normal level of travel and entertainment expense.

Since the beginning of the COVID-19 pandemic, our travel and entertainment expense ran at significantly depressed levels as COVID mitigation measures were put into place and business travel slowed to near zero. Over the past quarter, we saw a meaningful resumption of business activity as restrictions eased across North America and Europe.

We spent approximately $14 million on travel and entertainment this quarter. If we look back to the second half of 2019, travel and entertainment expenses averaged around $25 million per quarter in that pre-COVID environment. Given our new normal ways of working and various measures we put in place, we do not expect to see travel revert to pre-pandemic norms. We believe that our experience in the second quarter is approaching a new normal range for quarterly spending, and we expect to recognize at least $5 million in savings per quarter, or $20 million annualized, as compared to prior levels of activity.

Moving forward, we will continue to focus on maintaining expense discipline and scaling our global business. We employ a continuous improvement mindset, and we'll take full advantage of efficiencies where there are opportunities. In the second quarter, we incurred $5 million of restructuring cost related to this initiative. In total, we recognized approximately $247 million of our total estimated $250 million to $275 million in restructuring cost associated with the program. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.

Going to Slide 10, adjusted operating income decreased $129 million from the second quarter of last year to $412 million, primarily due to lower revenue as a result of the market declines. Adjusted operating margin was 35.1% as compared to 41.5% in the second quarter of last year. EPS was $0.39 as compared to 0.78 last year due to lower operating and non-operating income. In the second quarter, equity and earnings of unconsolidated affiliates was a negative $8 million as a result of unfavorable changes in CLO valuations, compared to a positive $40 million a year ago $0.78 last year, due to lower operating and non-operating income. In the second quarter, equity in earnings of unconsolidated affiliates was a negative $8 million as a result of unfavorable changes and CLO valuations, compared to a positive $40 million a year ago when valuations were increasing. Other gains and losses were negative $29 million this quarter as compared to a positive $25 million a year ago, driven by lower valuations of our seed capital associated with market declines.

The effective tax rate was 24.8% in the second quarter. We estimate our non-GAAP effective tax rate to be between 24% and 25% for the third quarter of 2022. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pretax income and discrete tax items.

On Slide 11, you can see how our asset base has evolved over the past two years. As client demand has skewed towards lower yielding passive products, we have tailored our product offering to meet that demand and experience significant growth in passive and money market offerings. Realizing that our business mix is shifting, we continue to be focused on aligning our expense base with these changes. While the declines in global markets pressured our margins this quarter, operating margin of 35.1% is within a normal range for where we are in the business cycle, and remains above our second quarter of 2020 levels the last time we experienced a market drawdown of this magnitude. As I mentioned earlier, we will continue to be vigilant in prudently managing expenses, and would expect margins to stabilize and eventually expand as markets recover.

I'll conclude with a few points on Slide 12. Our balance sheet cash position was $937 million on June 30, a decrease of $396 million as compared to last year. The lower cash balance was due to the $600 million early debt redemption in May at economically attractive terms. To help facilitate the early payoff, we carried a balance of $185 million on our revolving credit facility at the end of this quarter. We expect to repay that balance in the near term and begin to build cash again over the future quarters. In terms of the benefit, the early redemption resulted in a net $6 million of savings, with a make hold fee and other transaction related expenses being $5 million in the quarter, and interest expense savings of nearly $11 million this year.

Second quarter interest expense included the make hold fee and other related expenses that totaled $5 million, offset by nearly $3 million in interest expense savings. For the third quarter, we expect interest savings of nearly $5 million, and for the 4th quarter over $3 million. This will result in interest expense being lower by these amounts in the third quarter and the fourth quarter.

Our leverage ratio, as defined under our credit facility agreement was 0.7 times at the end of the second quarter. If preferred stock is included, it was 2.6 times. Both metrics are an improvement over 0.9 and 2.9 times from one year earlier, as our total debt outstanding reached its lowest level since 2015 at $1.7 billion. Overall, the progress we have made in managing our cost base and building balance sheet strength has given us a strong base from which to operate an ample flexibility to navigate the current drawdown in global markets.

We're confident that by continuing to execute the strategy we have laid out across our key capability areas, Invesco will continue to grow organically over the long run, and be the go-to partner for our clients, while delivering value to our shareholders. With that, I'm going to turn it over to the operator, and we'll open up the line for Q&A.

Questions and Answers

Operator

[Operator Instructions] Our first question comes from Ken Worthington with JPMorgan. Your line is open.

Kenneth B. Worthington
Analyst at JPMorgan Chase & Co.

Good morning. Thanks for taking the questions. I guess maybe first, gross sales slowed which doesn't seem surprising given market conditions, but the slowdown was particularly pronounced in the Asia-Pac region. And I think you commented on some equity funds, but I wasn't sure if it's that region. Was hoping if you could walk through the slowdown in Asia-Pac maybe by asset class and by region there, and help us understand how activity levels are developing in the region for the second half of the year.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Let me make a comment then Allison can pickup, Ken. So, we did see, obviously, a slowdown in net inflows in Mainland China, as we've highlighted. But in fact, we continue with net inflows there. I would say the sentiment is turning somewhat more positive from where it was. Still challenge and the COVID lockdowns really is a negative sentiment impact in the area, but we are having a greater confidence in the economic rebound, and quite frankly the consumer response to go back to investing in the region. But Allison, you want to make more specific comments?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Sure. I mean, I would just say, kind of looking at what drove Asia-Pacific over the quarter, I mean, certainly the slowed down put quite a bit of pressure on it. But as we break it down and kind of look at maybe the China JV, in particular, continues to be our growth driver inside of the region. Within the JV, we delivered $2.2 billion of net long-term inflows. That was really driven by primarily six new product launches, which drove the majority of those net inflows. And I would say those are mostly skewed towards fixed income, so not surprisingly more demand for fixed income then we would be seeing for equities at the moment there given just some of the overall sentiment pressure.

As we look across the region and look at Greater China. In Greater China we did see, I would say, some offsetting net outflows, primarily driven by outflows in our maturing -- fixed maturity products. Australia had an outflow quarter as well, that was primarily driven by outflows in our GTR product which has remained under pressure as we've talked about over a number of quarters. And then, I would say, some of that was balanced by inflows in Japan, where we continue to see strong demand for fixed income products in Japan. So, a little bit of I think mixed bag in the quarter, strong demand for fixed income, which of course we're seeing in a number of places, but certainly in the China JV and in Japan.

Kenneth B. Worthington
Analyst at JPMorgan Chase & Co.

Okay, great. Thank you. And then just on the balance sheet. The way you've pitched it is, from a position of strength you've deleveraged somewhat or even meaningfully. I think the stated goal is 100 -- I'm sorry, $1 billion of cash in excess of regulatory requirements, which gives Invesco the flexibility sort of when it needs it. How flexible is the balance sheet right now? It looks like the cash is pretty small over that regulatory requirement, but you've got a huge revolver that you can tap. Given you've pursued deals in more challenging times in the past, I don't know, just walk through how you see the flexibility of the balance sheet right now for your ability to do transactions, if interested.

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Yeah. Let me take the first part of that, and then I'll let Marty chime in as well. I would say a couple of things. One, and the stated goal you mentioned, this is pretty old. It's been a few years, and candidly, it predates my joining the company. We actually haven't had that goal in a few years. I think I shifted to some of what we've been guiding to more currently, which is, we're looking to strengthen the balance sheet overall. And that's not just through cash balances, there's obviously a cost of carrying a whole lot of cash, particularly when we have some debt to take care of at the same time.

So, I think you've seen a lot of our focus in kind of cleaning up a lot of the contingent liabilities and then starting to manage some of the capital structure at the same time. So, I'd guide you towards that. Just as you think about what are our balance sheet objectives overall, and that's to really put the balance sheet in a place where it's strong. Particularly in times like this I think about how much stronger the balance sheet is now than when we were in the last downturn a couple of years ago. I mean, that's giving us that optionality to do a number of things this year. We did engage in $200 million of share repurchases in the first quarter. And then, of course, taking advantage of the opportunity to early redeem $600 million in notes. We want to stay opportunistic and give ourselves the flexibility to do the same for the next maturity, which is in January of 2024.

What does that mean? So, for our overall priorities, I would say, our first priority is to reinvest in the business. It is much more cost efficient to grow organically then it is to go out and acquire inorganically. That doesn't mean that there is a change in our strategy from an inorganic perspective. But I think we've really demonstrated over the last couple of years that we have ample ability to invest in our business and grow our capabilities. And really thinking about some of our key growth capabilities like private market, our fixed income platform, our ETF franchise, our China JV, all the areas where you're really seeing us demonstrate the growth pretty consistently over the last several quarters, it's because we've been creating that capacity to invest in our own business. While at the same time keeping our eyes open should there be the right opportunity. Now, market conditions are certainly going to be rather choppy for that at the moment. But in terms of the opportunity we have with the breadth of our franchise to continue to invest in it, I think we're very bullish on our own opportunity to grow the franchise we have.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Allison, that was well said. I don't have anything else to add. And Ken, I'll just sum it up with the highlight. We're focused on reinvesting in the business in the areas of growth. We continue to look to reallocate resources where we are growing easy to say harder to do, but we continue to make progress there. And we've -- right now we have the greatest flexibility we've had in a good number of years. So, yes, we feel like we are in a position of strength.

Kenneth B. Worthington
Analyst at JPMorgan Chase & Co.

Great, thank you so much.

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Thanks, Ken.

Operator

Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.

Brennan Hawken
Analyst at UBS US Equity Research

Good morning, Marty. Good morning, Allison. Thanks for taking the questions. Curious, a few comments on being focused on expenses. Allison, you gave some color on T&E normalization and sort of calibrated for what the experience has been so far. But when we think about how much flex there is in the expense side, you guys normally talk about a 30% component that's variable, but is that still the right way to think about the rest of the year? And how much are you thinking about trying to do more given the challenging environment? And would that be more of a back half of the year event or would it be more like, well, the budgeting process for 2023 starts in probably just a few months, and so it's better to focus there so as not to be disruptive to investments and try and balance the competitive dynamics? Could you maybe help us think about how you're framing that at this point?

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Brennan, let me make a comment and Allison will also chime in. So look, we said time and time again, and you follow this sector for a long, long time, it is very difficult for an asset manager to adjust expenses in the short-term to follow such a drawdown in the market. Quite frankly, we don't try to do that. We look at it in two different ways, when it's in a period of uncertainty, which we are right now. We hit the brakes, we do all the things that you would imagine we would do, look at things that are tactical, ways to slow investing in the business, we are doing that. And then we look longer term, there we continue to adjust accordingly, and it's largely focused on trying to find ways to reinvest in the areas that Allison talked about where we're seeing growth. And so it's really two-pronged approach. And we've done it historically quite effectively, we'll continue to do that. But Allison, will you please add to that?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Yeah. Thanks Brennan, for the question. I mean, I'd say a couple of things. As you think about our overall compensation expense, about a third of that is variable. So that obviously flexes pretty quickly with the change in revenue for the most part. It's not a perfect relationship, but it's fairly quick given just a variety of incentive compensation plans that we would have driving overall incentive comp. It's much more difficult to adjust overall compensation, nor would we necessarily want to. We want to be really thoughtful about positioning our expense base, not just for the short term but the medium term as well. And I think that really underscores a lot of Marty's points.

So, I think probably the essence of your question is, where do we go from here? I would say a couple of things. On compensation, compensation tends to fluctuate in that 38% to 42% as a percent of revenue range. You should expect us when revenue draws down as quickly as it has, and we expect it to be under pressure. And this year we'd be in the higher end of that range. Underneath that we're going to be really thoughtful about making sure we're allocating resources and being very thoughtful about just hiring overall and where we position that next hire and how we really manage against the opportunities we have, and what's critical versus not critical. I think that's the essence of how we manage in the short term from here.

Certainly a challenging quarter to have, revenue under so much pressure, and a return to that kind of wide open travel environment at the same time. I don't think we ever would have expected those two events to occur in the exact same quarter, and it put an enormous pressure on the top-line and the expense line at the same time. We do expect that travel normalizes from here, again, at the new normal that I talked about earlier. And we'll be really thoughtful about travel in this environment as well. When our clients want to see us, we want to stay in front of our clients. It's as important now as ever in times of real volatility, to be in front of our clients. We can also be very thoughtful about our internal gatherings of some of the discretionary spend we have from there.

So, it's hard to give you exact answers on all of this, but hopefully that gives you a little bit of color as to how we're thinking about operating and how we're managing in this environment. We do think we're managing from a position of strength, but we're going to be very thoughtful about all of our actions and decisions.

Brennan Hawken
Analyst at UBS US Equity Research

Yeah, thanks for that. It's very, very thorough from both of you. Appreciate it. In the quarter we also saw MassMutual increase their stake. Could you maybe talk about a dialog and how dialog with them has progressed? And whether or not you can continue to explore expanding that strategic relationship to potentially bring even more benefits beyond the obvious ownership tie-up?

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Great question. Look, the thing to look at is, they increased their ownership stake in the company and they have great confidence in the organization. We continue to have very good strategic conversations, they're extremely wide-ranging, and it's just a constant dialog of where could we opportunistically work together and that continues. So, again, I just plan on seeing a deeper broader relationship in the quarters and months ahead. And you were saying?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Yeah, I mean, the only thing I would add is, they continue to be opportunistic because I think they have a very long-term view on the opportunity that's there, and there's a really deep partnership that continues to grow and expand. And I think this is a mutually beneficial relationship on a lot of sides and you're seeing that as they continue to take a long-term view on the overall opportunity in the common stock.

Brennan Hawken
Analyst at UBS US Equity Research

Okay. Has there been any corresponding adjustment to the positioning on their platform or any shift in how you guys are racking as far as flows on their platform go, or anything like that?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

I think we continue to be the second largest broker dealer in terms of AUM on their platform. I think we're their largest in terms of sub-advised and DCIO mandate. We manage about $5 billion on their platform, and an additional $5 billion in variable annuity and sub-advised AUM. I'd say, in addition to that, we've got about over $3 billion in other investment relationships with them, which consists of their investment and our alternative strategies in terms of their co-investment, and our investment strategies and some of our alternative capabilities. So, I mean, it's a rather broad relationship.

Greg Ketron
Head of Investor Relations and Treasury at Invesco

And I get it, Brennan, that's all really valuable. But I think, in particular, them being an anchor tenant, co-investor investor in our alternative capabilities is really meaningful. It's not just from the money itself but in the investment, but really the credibility that comes as an anchor tenant when we go to market with your background and you recognize how important that is.

Brennan Hawken
Analyst at UBS US Equity Research

Yeah. Greg, thanks for that color. Appreciate it.

Operator

Thank you. And our next question comes from Mike Cyprys with Morgan Stanley. Your line is open.

Michael J. Cyprys
Analyst at Morgan Stanley

Hey, good morning. Thanks for taking the question. Just given the market volatility with rising rates, so just curious to hear a little bit of what you're hearing from your institutional clients just in terms around asset allocations, what sort of changes are you hearing your clients' thinking about, contemplating just given the volatility of the rising rate backdrop? And how do you see that also impacting 60:40, which had probably the worst quarter in many decades? So just curious, how do you see that evolving from here. Thank you.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Yeah, great question. I'm sure you're having endless conversations with your clients, too. And I will say it's all over the map. I would say, whether it was institutional or retail, and these are broad comments, largely everybody hit the brakes in the first part of the quarter just to see what is going on, what's the depth of this, where this is heading. And now the conversations are moving more towards, I'll speak more towards institutional investors, for us, where are the opportunities, how should we think about our asset allocation. There is an absolute focus on a blueprint towards where should the asset allocation be in an inflationary environment. The conversations around duration and fixed income, some people are actually thinking less exposure to fixed income, greater exposure to things like real estate. So again, s really there is no simple answer, and it's probably as broad a conversation that I've had with clients. As long as I can remember, there is no common theme of where the next step is for any one institution.

That said, the good news is the breadth of our capabilities puts us in a position where we can serve any one of the decisions that many of these institutional clients will take.

Michael J. Cyprys
Analyst at Morgan Stanley

Great, thanks. And just a follow-up question, if I could, just on ESG. I guess two-pronged here. One, maybe could you just update us a little bit on some of your initiatives, remind us how much AUM and inflows you guys are seeing? And then just more broadly on ESG, what sort of risks and opportunities do you see from increased ESG regulation but also regulatory scrutiny on ESG products that we're seeing come to the industry? Thank you.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Let me hit the more macro points and turn it to Allison. I will say it's fascinating, the ESG conversation has evolved quite dramatically, I'd say, over the last six months. And it is a different conversation in different parts of the world where the EU, in particular, the UK dramatically far ahead of where the United States is, and much more specific on what ESG means and how to implement ESG within the portfolios. The good news about it is, you have a roadmap, you know what you're doing. Obviously, here in the United States it's a very different conversation client by client.

And from our perspective, what we've done everywhere is, we don't have a top-down policy when we think about ESG, it is really client-driven portfolio management driven, supported by an ESG team. And that's how we have implemented it. It is harder in the United States, I'd say in particular, because the road map's not there. There is, absolutely -- obviously, you'd see there is a regulatory push that is coming to be much more specific on climate and ESG. I ultimately think a framework will be very, very helpful. But in this current moment, it's really quite challenging. Allison, you want to pick it up from there?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Sure. I mean, I would just say a couple of the specifics. As of the end of June 30, we managed $77 billion in ESG AUM across over 200 funds and mandates, that's about 6% of our overall AUM. So it's quite a bit lower on an absolute basis relative to where we were in the first quarter, but that's really a function of the market declines, and some of the outflows. We did see about $2.4 billion in outflows in that ESG AUM, and that was really driven by active retail, and in particular our GTR and some of our quantitative equity strategies. So, it's kind of consistent with, it's really a subsection of some of the outflows we've been talking about in terms of other categorization.

Beyond that, we really think about our AUM in terms of trying to move towards what we would consider a minimal but systematic integration of our ESG integration. And we've got about 85% of our AUM currently under this definition of minimal but systematic integration. And our aspiration is to get all of our AUMs under the same kind of integration category. And it's really thinking about our ESG approach as being defined and consistently applied across all -- from all of the portfolio managers and really ESG considerations being used consistently in the investment decisions. But again, that all is kind of under the banner of some of the macro themes that Marty gave you.

Michael J. Cyprys
Analyst at Morgan Stanley

Great, thanks so much. Appreciate all the color. Thank you.

Operator

Thank you. The next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell
Analyst at Deutsche Bank Securities

Great, thanks. Good morning, folks. Maybe if I could just focus on some of the investment in the T&E and getting out on the road more and talking with financial advisors on the retail side. Maybe if you could just, I guess, characterize the current environment, is it similar to what you described on the institutional side, Marty, in terms of sort of initially being frozen, but now obviously with markets down a lot there is a lot more opportunity?

And do you think getting on the road more and getting out in front of advisors that that will have a demonstrable positive impact on sales growth in the retail channel? Just maybe your outlook on that as we get -- as we move forward in the second half.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Yeah, a couple of comments. I'd say, we're spending time with both wealth management platforms advisors and institutional clients, frankly in the United States and Europe. Yeah, it's palpable, the different engagements obviously with client side, I think, we've also got to one another. And again, everybody on this call has been having that same experience. There is just -- Zoom is wonderful, but it is just not the same and it does advance relationships and exchange of thoughts and opportunities, there's no question in my mind.

I'm not going to tell you that it's going to drive sales straight up through at the moon, I just don't think I could make that correlation, but it is clearly a net positive. And it is something, as Allison said, we are going to be very disciplined on discretionary travel. Internally, although we think that's important, we can live without that, we have for the last few years. But we are really -- we're just going to continue to be with our clients as we think that's important for the business and the relationships that we have.

Brian Bedell
Analyst at Deutsche Bank Securities

Yeah. That's a good color. And then just a follow-up on longer-term expenses. Obviously, you're continuing to manage expenses diligently in this environment. Any commentary about sort of structural expense saves from migration of the custody and back office? I think you're using the Alpha platform and that converts, I think, over a longer time frame the Alpha platform that is over a longer time frame of a couple of years. Can you talk about what -- how that might -- is that material to impacting the cost base when that migration occurs or is that that's more futuristic?

Marty L. Flanagan
President and Chief Executive Officer at Invesco

So, it is an important undertaking for us and it's by two to three years out. We are at the stage of starting to sort of rolling implementation. It is very broad, it's very deep, it's quite complex as you would imagine, because it is really a total step back on our operating platform. And we think it's really meaningful and important for the future of the organization what we're trying to do with data and etc. No different than, again, every organization on this phone. There are other areas, again, Allison had spoke to, if we are looking very hard within the organization is a sort of a muscle that we are hell bent developing over the last few years by just getting stronger and stronger of challenging ourselves of where are the dollar spent. And is that the right spot for the dollar or should it be reallocated towards growth and driving operating income. Allison hit the areas, you know the areas, whether it be China ETFs, etc. in the private markets.

That said, there will be times where in that process we'll say, the best place for the dollar to go is to the bottom-line. So we are pulling on all of those levers and we just constantly do it. A downturn in the market doesn't make us wake up, I think we should do it, this is quarter what we do. And I think, again, as we continue to point out over the last couple of years, you can see with the movement in the effective fee rate and our ability to maintain margins is something we keep pointing to. Again, in this downturn protecting margins is a much more difficult thing to do. And I would just reiterate the point that Allison said earlier, markets will return, and in that period you will see the expansion of our margin again, wow, in fact we continue to invest in the future or make a decision to have that next dollar drop to the bottom-line.

Brian Bedell
Analyst at Deutsche Bank Securities

Okay, that's a good color. I have a follow-up, but I'll get back into the queue. Thank you.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Thank you.

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Thank you, Brian.

Operator

Thank you. Our next question comes from Glenn Schorr with Evercore. Your line is open.

Glenn Schorr
Analyst at Evercore ISI

Hi, thanks very much. So, I guess I want to pull out a little more from you in terms of your thoughts on clients. You both mentioned lower gross sales were kind of flat, redemptions, which in a way in a market downturn is reasonable. So, A, you have a growing ETF franchise, do you think as people come back, as markets settle eventually, do people come back via the ETF over single stocks and mutual funds in your mind? What have you seen in the past? And then which inflation-protected products and higher interest rate positioned products do you think might see some of that shifting money? Thanks.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Yeah, a couple of comments. First of all, what I'd say, it's hard to predict the future in this immediate moment. But again, that's what we're all meant to be doing. The ETF -- in wealth management platforms the ETF is obviously a vehicle of choice. The mutual fund still has a place, it doesn't have the same focus right now that SMAs and ETFs has, but in fact it's an important part of it. We do see, we believe, that that vehicle will continue to be a part of the answer going forward. That said, what really matters is the investment capabilities within each of the vehicles, we look at that is the primary driver.

As you move to what are the areas of asset classes that will be more interesting in this environment. Bank loans will continue to be -- you're going to continue to see the commodity suite within our organization would be active or passive continue to be an area of focus. Real estate is another area of focus for the organization. So there are a number of areas that, again, clients are turning to and you've seen that over the prior year or so. And quite frankly, there is greater conversation on retail platforms of movement back towards focus on value suites of equities which, needless to say, that has not been in an area of focus over the last period of time. Allison, anything you would add to that?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

No, actually, I think you covered it.

Glenn Schorr
Analyst at Evercore ISI

Cool. Maybe just one other thought process on product preference. You have a growing private markets business even in this backdrop, I'm curious just big picture thoughts on performance, client interest flows, opportunities, as a comparison to all your other public market-oriented vehicles. Thanks. Appreciate it.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Again, hard to totally compare and contrast. But, look, we've all seen the growth in private markets over the last decade. They continue to be an area of focus for us. Where we have areas of strength that continues to be an area of growth, an accelerating growth, and we are turning our attention to continuing to organically drive that growth. And it is a part of any conversation that we're having with our institutional clients particular, and now the wealth management platform's looking for ways to find exposure to alternatives capabilities.

For us the most prominent one that is coming down the path right now is Enric [Phonetic] in the United States, wealth management platform. And quite frankly, it's been quite successful outside of the United States through a joint venture we've done with UBS. So again, it continues to be an area of focus for us, a continued area of growth as we look at forward in the quarters ahead.

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

I mean, I'd just add to that. I think we continue to see really strong originations overall, inflows into our private market capabilities, particularly into our direct real estate business off late. You've got kind of a confluence of factors and events happening there as there is perhaps a shift in some preference for some real assets in this environment. At the same time you're starting to see, given the downturn in the equity markets, from an allocation perspective, you've got maybe perhaps some overexposure to real assets at the moment, to real estate at the moment relative to benchmarks, so that's going to take some time to normalize out. But despite that, we continue to see very strong growth in overall client commitments to direct real estate in the first half of the year. And obviously, very strong interest, primarily from our institutional channel. But as Marty noted, with the growth that we have and some retail-focused strategies, we're starting to see some positive signs there.

We've got quite a bit of dry powder in our business and that's really the capital we have from clients that haven't -- that has not yet been deployed in terms of direct mandates. And that's really kind of captured in that one not funded pipeline on the institutional side and the growing allocation we have there to alternatives really does point to the growth in the direct real estate business. So, I mean, I think overall we're very cautiously optimistic that we could continue to see good growth there. And I'd say, on the senior loan side, at some point there will be some desire as credit spreads start to widen for exposure there. At the moment, it's been really managing the interest rate exposure, but there will be credit risk exposure that the clients are going to be seeking, and that's going to bode well for our platform also.

Glenn Schorr
Analyst at Evercore ISI

Okay. Thanks, Allison. Thanks, Marty.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Thank you.

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Thanks, Glenn.

Operator

Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.

Daniel T. Fannon
Analyst at Jefferies Financial Group

Thanks, good morning. Wanted to talk about performance. And looking -- as you look at your active franchise, are there products or categories that you see there are performing well that you have the potential to grow at a faster pace as the market becomes more stable or grows big or sales environment improves? Looking at your US value, it looks like the one year number has gotten a lot better. I don't know, if you just kind of think about it, as you look at all the various products, anything that stands out has the potential to really potentially improve in any way.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Good question. So if you look -- a few comments, if you look at the fixed income suite of products continue to be strong,. and demand continues to be there. Obviously, it's shorter duration fixed income at the moment, and you would be surprised, as the market environment that we're in. You also highlighted, if you look at the US value franchise, the performance has improved quite dramatically. That has been an area of out of favor from a demand point of view, from an industry -- if not unique to us but for industry perspective. Quite frankly, I have been in any number of conversations over the last number of months where there is conversation people turning to US value as an asset class. And if we -- if you asked me that question 12, 24 months ago, that just was not on the horizon.

The other area that's really important to us is the global equity franchise, emerging markets in particular. And the performance is challenged at the moment. That said, I think it's some of the most, just arguably the most talented emerging markets manager in the business. And his shorter-term performance is improving quite strongly and that's going to be an asset class. Even though it's out of favor right now, it's going to produce spectacular results for clients, and no doubt, return to net inflows in the quarters ahead.

Daniel T. Fannon
Analyst at Jefferies Financial Group

Got it. And then just question on China in the backlog, or it would be outlook for new funds, I think that's around six new funds with just under $2 billion inflows in the second quarter. How do you think that's tracking for the -- in the back half of the year?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Hard to say exactly. I mean, I would say, overall -- let me compare, maybe second half of '22 may not look all that different from the second half of '21 -- sorry, first half of '22. Let me say that again to make sure that's clear. Second half of '22 may not look that different from the first half of '22 in terms of new product launches in China. I do think it's highly dependent on just where they go with COVID measures and. really how the government thinks about the economy there and some of the growth they may be stimulating. So we're going to be watching that very carefully and we're going to be positioning product very carefully against that.

Relative to '21, it's certainly lower and different. In terms of our new product launches last year you would have seen more balanced and equity focused products. What you've seen so far this year is a little more fixed income focused, which makes sense just given where sentiment and client preference is at the moment. So, I'm not sure if that's helpful. It's hard to say given the measures that are continuing to evolve there, but that's generally how we're thinking about and what we'll be watching for.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

And Daniel, here's how I think about it, and you're asking the right question. So, where we believe China is sort of in the economic cycle, it's looking towards a rebound. So they're ahead of the United States and Europe. There is a lot of focus on the leadership to stimulate the economy for all the reasons that we know about. So, I look at those as two powerful forces of reason to be optimistic. But one to be cautious about is just what Allison said, it is still a very challenged lockdown COVID environment, although they are easing. And so if it -- let's say, if you sort of model through COVID and you have those other two factors holding true, we continue to look at China as being a contributor, and a growing contributor again. Timeframes are hard to determine.

Daniel T. Fannon
Analyst at Jefferies Financial Group

Thank you.

Operator

Thank you. Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt
Analyst at Autonomous Research

Good morning. Thanks. So the active bond inflows I think were pretty notable relative to what we're seeing in the industry, where the active bond flows look like it's going to be one of the worst quarters ever. I saw the comment about short duration in the deck, but it still seems like a pretty dramatic departure from what the industry saw. So anything else you could point to about your mix, strategy, and/or how you distribute these products that you think cause such a dramatic positive break is what the industry is seeing on the bond -- active bond side.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

You're right. From an industry perspective, the results are very, very strong and it really is just a reflection of the depth, breadth and capabilities of the team and the way that they gain confidence within the channels. I don't know that I would highlight anything other more specific than that, but a recognition of the talent and how we are interfacing with our clients. So, again, it's wonderful to see when you're relatively outperforming what is a very challenging market environment.

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Only thing I'd add to that is China. China definitely helped drive some of the strength in fixed income as well. And I think that points to just, again, the underlying strength we have and our positioning in China.

Patrick Davitt
Analyst at Autonomous Research

Thanks. That's all I have.

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

Thanks, Patrick.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Operator, we have time for one more question.

Operator

Sure. And our last question comes from Alex Blostein with Goldman Sachs. Your line is open.

Ryan Bailey
Analyst at Goldman Sachs & Co.

Good morning. This is actually Ryan Bailey on behalf of Alex. The first question I was going to ask was around the net revenue yield, some of the market headwinds, particularly FX I think got worse later in 2Q. So can you give us a sense of what the exit rate was for the net revenue yield what was reported for 2Q?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

We really -- net revenue yield really is a function of overall averages. It's average AUM, there is really not an exit rate in it. If you think about what was driving net revenue yield inside of the quarter, I mean, it is almost entirely explained by the declining equity markets. And then secondarily, but also very importantly, the continued growing asset mix shift that we're experiencing towards our passive product. You had some positive offsets in that just in terms of the abatement of money market waivers and an extra day in the quarter. But net revenue yield really is pretty simply explained by the overall declining equity markets and the pressure we experience in that along with the mix shift in our AUM.

In terms of exit rate, how you should think about it for the future quarters? I would say, we would expect to continue to see demand for our passive capabilities. We expect to continue to see pressure on our equity AUM, just given the exit rates in terms of the market impact on the quarter. So, I would expect to see net revenue yield continue to grind a little bit tighter in the quarter. But I'll just remind everybody that we really focus on both revenue. Net revenue yield is just an output, it's not an input, and it doesn't reflect changes in the fee rates, it's really just the mix shift and the overall market impact. We continue to focus on revenue, stabilizing it for now, growing it, and really managing our expense base against that. And for the business profile, not just that we have today, but that we expect to continue to evolve and ship to in the coming years.

Ryan Bailey
Analyst at Goldman Sachs & Co.

Got it. And maybe just to hit on that last comment around expenses. Allison, I think you mentioned that you expect the margin to eventually stabilize, and then expand as markets return, and that 35% was kind of the right place to be in for the business cycle. I guess just as we think through the dynamics for the next quarter, the challenging market for 2Q, is there a set of things that maybe will slip a little bit below where we were for 2Q as we enter next quarter?

Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco

I mean, I do think that when you think about where asset levels were at June 30, and just the entry point into the quarter with asset levels, and you can certainly expect the net revenue will continue to be under pressure in the quarter. So, while we are hyper-focused on expenses, as you've heard us talk about, you can't expect what's the overall impact of that in terms of operating margin. But if we continue to see equity markets under this kind of pressure throughout the quarter, it will be difficult. But I think it's reasonable to expect operating margin is going to be at or slightly below where it was in the second quarter. Lots of moving parts, and the market being the biggest driver in that, but we're going to continue to stay focused on managing what we can commit what we can manage, and controlling what we can control.

I think we're wrapping up here, but I'll just close with, we are operating from a position of strength there. We do have expense discipline measures in place that give us the opportunity to be very thoughtful about the margin from here. And our balance sheet's in a strong place and we have the opportunity to be opportunistic and to continue and invest in our business. And that's most important, because these markets will stabilize and I think we're really well positioned in terms of our key capabilities in supporting our clients and growing with them from here.

Ryan Bailey
Analyst at Goldman Sachs & Co.

Thank you for all the color.

Marty L. Flanagan
President and Chief Executive Officer at Invesco

Well, let me just say, thank you for your time. Thank you for your questions and the engagement. And look forward to being in touch with everybody over the next months before we visit once again next quarter. Thank you.

Operator

Thank you. That concludes today's conference. You may all disconnect at this time.

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